Liaoning Fu-An Heavy Industry Co.,Ltd's (SHSE:603315) price-to-earnings (or "P/E") ratio of 71.2x might make it look like a strong sell right now compared to the market in China, where around half of the companies have P/E ratios below 34x and even P/E's below 20x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Liaoning Fu-An Heavy IndustryLtd has been doing a decent job lately as it's been growing earnings at a reasonable pace. One possibility is that the P/E is high because investors think this good earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Liaoning Fu-An Heavy IndustryLtd

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Liaoning Fu-An Heavy IndustryLtd would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a decent 4.8% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen an unpleasant 45% overall drop in EPS. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 44% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Liaoning Fu-An Heavy IndustryLtd is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

What We Can Learn From Liaoning Fu-An Heavy IndustryLtd's P/E?

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Liaoning Fu-An Heavy IndustryLtd currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Having said that, be aware Liaoning Fu-An Heavy IndustryLtd is showing 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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